OREANDA-NEWS. April 15, 2015. Shell has become the first major to take proper advantage of the low oil price, taking out a company that it has long been interested in buying: BG. And the reason is a good one: not growth for its own sake but using BG’s assets to help it achieve its own goals faster. The transaction is underpinned by BG’s asset value, it said.

Shell sees deepwater activities and “integrated gas” – read, LNG, with or without upstream production – as yielding cashflow of between \\$15 billion and \\$20 billion each, thanks to the merger.

The deal will transform Shell, bringing in an array of assets for it to pick the biggest and best. BG’s assets in Australia, Brazil and perhaps east Africa all bring something for Shell to work with.

Then it will dispose of the many more that will have dropped below the materiality threshold. Turkey, Namibia, China, and other areas where drilling is underway will remain on the slate, as will Schiehallion and Claire fields in the UK North Sea. And Shell is not planning to leave the Arctic undrilled – despite the environmentalists, it is going to see exactly what is there before deciding whether to walk away. There are some fringe benefits, such as marrying up Arrow LNG’s equity gas with BG’s expensive plant in Queensland. And Shell will for the first time be able to bring LNG into the UK using its own terminal – Dragon LNG, just down the coast from South Hook in west Wales.

But one can imagine that Shell will have little appetite for pursuing further production in Egypt – now becoming very much a domestic gas supply story – or technically challenging fields in the UK. It will have shareholders who will expect reward for their patience, share buybacks and debt gearing to dial back as priority goals. It has set a target of \\$30 billion from asset sales in the years immediately following the deal, although how long it will take to achieve those goals will depend on the oil price.

Ever since the UK monopoly British Gas demerged in the late 1990s, the exploration company was seen as a natural fit for Shell, and over the decades, weekend papers have regularly carried reports of an imminent takeover.

But analysts also doubted if the major could add more shareholder value than the existing board. While its own CEOs came and went, BG’s longterm CEO, Frank Chapman, presided over a sustained period of wealth-creation, funded by remarkable exploration success and pioneering LNG strategy. In the post-Chapman era, BG’s failure to hit output growth targets, its well-publicized problems in Egypt, the US shale story and its initially slow approach to asset disposals all contributed to a sharp decline in its share price, despite hitting key targets in Australian LNG and the Brazilian subsalt.

This falling share price opened up a value gap for Shell, which was able to make a generous offer that could deter a rival bid. It has offered a 52% premium to the 90-day average share price, valuing it at some \\$70 billion. Not every company could benefit as much as Shell from BG’s particular set of assets, where cost savings in shipping and LNG trade will play a role in delivering annual savings of several billion dollars almost immediately.

On the skill side, both companies are familiar with deepwater exploration and production and have a predominantly gassy output, although BG more so than Shell.

And both are keen on LNG trading for its own sake, although more of Shell’s equity production is tied up under long-term contracts sold by joint ventures such as Nigeria LNG and Malaysia LNG. Nevertheless, of the 34 million mt that it delivered last year, only 26 million mt/year were its equity share; the rest was from the market.

The deal will give the new Shell a total of about 45 million mt/year of equity production to market, taking out one of its biggest competitors and making it one of the single largest LNG suppliers in the world. Some of that LNG will be the cheapest US LNG, from the first two trains of Sabine Pass.

In a smaller market – global trade has been stuck at about 245 million mt/year for the last few years – this concentration would translate into upward pressure on prices. However, given that between now and the end of the decade, more than 100 million mt of LNG is anticipated to hit the market from projects in the US and Australia, the effect on LNG prices may not be immediately apparent.